May 31, 2015

At the Robinson Line

Comment on Lars Syll on ‘Consistency and validity is not enough!’

Blog-Reference

There is political economics and theoretical economics. People see a problem or are shocked by a great evil and begin to move heaven and earth to improve the situation. This is political economics and nothing is wrong with it.

Science is different — it tries to find out how things work from the universe via society and the economy to the quark — and nothing is wrong with this either.

Confusion results when the realms of political and theoretical economics are not properly kept apart. What the history of economic thought from Smith, to Marx, to Hayek or Keynes shows is that political economics has more or less successfully tried to hijack theoretical economics. This is the main reason why economics is a failed science.

The goal of theoretical economics is to understand how the actual economy works. Every theory has an architectural structure which can be described as follows (the keywords are fact and logic):
“When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts .... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework.” (Hilbert, 2005, p. 1107)

This necessarily leads to J. S. Mill's Starting Problem:
“For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

This, then, is the key question of theoretical economics:
“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy. (Mill, 2006, p. 746)

The propositions which may reasonably be received without proof are called axioms. Orthodoxy starts with behavioral axioms (McKenzie, 2008). In order to go beyond failed Orthodoxy, behavioral axioms have to be replaced. This was Keynes's most valuable methodological insight.

“The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight — as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

Unfortunately, Keynes's own formal foundations are also defective (2011), therefore there is nothing to choose between Walrasianism and Keynesianism. With regard to the accustomed approaches it incontrovertibly holds what Joan Robinson concluded: "Scrap the lot and start again."

Nobody accepts Orthodoxy because it is true beyond reasonable doubt but because traditional Heterodoxy is even more clueless.
“The main reason for the considerable acceptance of the approach is that fundamental rule of scientific combat: it takes a theory to beat a theory.” (Stigler, 1983, p. 541)

This leads back to Mill's Starting Problem.

The formal foundations of Constructive Heterodoxy consist in seven propositions* which can be reduced for a start to the following three axioms.
  • Income of the household sector Y in period t is the product of wage rate W and working hours L: Y=WL
  • Output of the business sector O is the product of productivity R and working hours: O=RL. The productivity R depends on the underlying production process. The 2nd axiom should therefore not be misinterpreted as a linear production function.
  • Consumption expenditure C of the household sector is the product of price P and quantity bought X: C=PX.
The first three structural axioms represent the pure consumption economy with one firm and one product, that is, no investment, no foreign trade, and no government. No nonentities like utility, optimization, rational expectation, supply/demand function, production function, equilibrium, etcetera are taken into the premises. This has always been the inexcusable methodological blunder. The three objective equations are the minimum requirement of every economic model whatsoever. They solve Mill's Starting Problem and provide the rock-solid basis for a comprehensive theoretical superstructure that consists of testable propositions.

Theoretical economics must satisfy the criteria of material and formal consistency. The Robinson Line demarcates science from non-science. To go on with the obsolete approaches is not an option.

Egmont Kakarot-Handtke


References
Hilbert, D. (2005). Axiomatic Thought. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, volume II, pages 1107–1115. Oxford, New York, NY: Oxford University Press.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2011). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
McKenzie, L. W. (2008). General Equilibrium. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–18. Palgrave Macmillan, 2nd edition. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund. URL
Stigler, G. J. (1983). The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL

* The complete and consistent set of foundational equations — six structural axioms
and one behavioral function — is given here

May 29, 2015

Hold the handle, not the blade

Comment on ‘Debunking the use of mathematics in economics’

Blog-Reference

What Velupillai criticizes is the application of topology in equilibrium theory. The persistent abuse of mathematics is a rather obvious fact that has been observed by many — notably heterodox economists.

“It is difficult to contemplate the evolution of the economic science over the last hundred years without reaching the conclusion that its mathematization was a rather hurried job.” (Georgescu-Roegen, 1979, p. 271)

That economists misapply mathematics is what Velupillai said on numerous occasions. He concluded:
“Somewhere between the Political Arithmetician, alias the National Income Accountant, and the Financial Analyst, alias the Accountant, lies the task of the quantitative economist’s analytical role, and none of the theoretical or applied tasks of these two pragmatic and paradigmatic figures requires anything more than arithmetic, statistics and the rules of compound interest.” (Velupillai, 2005, p. 866)

The fact of the matter is that economists even messed up the simple mathematics of accounting (2012).

What economists have attempted again and again is to take a mathematical tool and then to reformulate the economic problem so that it fitted the tool. Calculus, for example, required the introduction of a well-behaved production function and decreasing returns. This led to some funny cognitive dissonances.

“’So, Brian, what are you working on these days?’ Arthur had given him the the two-word answer just to get started: ‘Increasing returns.’ And the economics department chairman, ..., had stared at him with a kind of deadpan look. ‘But — we know increasing returns don't exist.’ ‘Besides,’ jumped in Rothenberg with a grin, ‘if they did, we'd have to outlaw them!’ And then they'd laughed.” (Waldrop, 1993, p. 18)

This is how reality vanished from economics.

The same funny logical headstands happened with topology.
“Surely it would be considered absurd, bordering on the insane, if a surgical procedure was implemented because a tool for its implementation was devised by a medical doctor who knew and believed in topological fixed-point theorems?” (See intro and Nadal, 2004, p. 36)

From the fact that Orthodoxy always holds the sharp mathematical knife at the blade with terrible/ridiculous results does not follow that knives have to be abandoned but only that Orthodoxy has to be abandoned.

By the way, the appropriate mathematical tool for the solution of the ‘age-old problem of the equality between supply and demand’ is not a set of equations but a simulation (2015, Sec. 4).

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1979). Energy and Economic Myths, chapter Measure, Quality, and Optimum Scale, pages 271–296. New York, NY, Toronto, etc.: Pergamon.
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
Nadal, A. (2004). Behind the Building Blocks. Commodities and Individuals in General Equilibrium Theory. In F. Ackerman, and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, pages 33–47. London, New York, NY: Routledge.
Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics. Cambridge Journal of Economics, 29: 849–872.
Waldrop, M. M. (1993). Complexity. London: Viking.

May 28, 2015

Poor philosophy, poor science, poor job

Comment on Lars Syll on 'Adam Smith’s visible hand'

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The classicals called themselves Political Economists and they never left anybody in doubt what agenda they pushed. However, there was an ambiguity right from the beginning. The classicals also had high scientific ambitions. They were aware that with simple good/bad moralizing they were in the same boat with religion — a no-go in the age of enlightenment.

“The backward state of the Moral Sciences can only be remedied by applying to them the methods of Physical Science, duly extended and generalized.” (Mill, 2006, p. 833)

There was a political need to formulate a new moral philosophy and Adam Smith responded to it.
“Adam Smith, when he wrote his Wealth of Nations ... understood by political economy  a branch of the science of the statesman or legislator, ...” (Halévy, 1960, p. 104)

To get economics off the ground as a science made it imperative to say something general about human behavior in the economic realm. J. S. Mill was the first to state a behavioral axiom.

“Just in the same manner [as geometry] does Political Economy presuppose an arbitrary definition of man, as a being who invariably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained in the existing state of knowledge.” (Mill, 1874, V.46)

Mill regarded this proposition as an empirical law which resembles, but has to be carefully distinguished from, universal deterministic physical laws. Empirical laws are neither deterministic nor universal, they express merely a local and temporary tendency.

“In political economy for instance, empirical laws of human nature are tacitly assumed by English thinkers, which are calculated only for Great Britain and the United States.” (Mill, 2006, p. 906)

This can be taken as a real-world description of human behavior in a concrete historical setting. Mill always remained within the confines of empirical science. However, the question is, what has this rather dull philosopy/psychology/sociology to do with econonomics and, more important, with science?

After some hundred years we know that to build economics upon the behavioral assumption of utility maximization leads only to general equilibrium theory — one of the greatest scientific embarrassments of all time.

The preoccupation with philosophy/psychology/sociology somehow took economists down the wrong path. After more than two hundred years they still do not know how the monetary economy works.

Does the world expect from economists to find out how people behave? No, this is the proper job of psychology, sociology, anthropology etcetera. Does the world expect from economists to figure out what profit is? Yes, of course, no philosopher, physicist, biologist, or sociologist will ever try to figure this out.

Have economists done their proper job? No (2014). The profit theory is false since Adam Smith gave his contemporaries the moral sentiments they so urgently needed.

Egmont Kakarot-Handtke


References
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

Who said what to whom — and does it matter?

Comment on ‘Keynes "hadn't got round to it"’

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Keynes is always right because, as a genuine political economist, he said many plausible things and also the opposite.

“It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent.” (Valentino, 1988, p. 239)

The problem with Keynes is that he never developed a consistent theory. As a centerpiece of his General Theory he formulated the foundational syllogism of macroeconomics:
“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit.

“His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson and Bezemer, 2010, pp. 12-13, 16)

The fault in Keynes's two-liner is in the premise income = value of output. It can be rigorously demonstrated that this equality holds only in the limiting case of zero profit in both the consumption and investment good industry (2014; 2011).

Keynes dealt with a zero profit economy without being aware of it. And it is post-Keynesians who hadn't got round to it until this very day.

As Keynes put it: “Insufficiency of cleverness, not of goodness, is the main trouble.”

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, pages 238–249. Cambridge, New York, NY, etc.: Cambridge University Press.

May 26, 2015

The intelligent layperson's guide through vacuonomics

Comment on ‘Consistency and validity is not enough!’

Blog-Reference

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Economists have no true theory.

It is important to distinguish between political and theoretical economics. Quite similar on the surface, these are entirely different endeavors. The goal of political economics is to push an agenda; the goal of theoretical economics is to explain how the actual economy works. In political economics anything goes; in theoretical economics scientific standards are observed.

Political economists cannot explain how the actual economy works. There is much opinion and storytelling but little knowledge. Theoretical economics, on the other hand, is virtually non-existent. The two criteria theoretical economics must satisfy are material and formal consistency.

The reason why economics is a failed science is that it has followed the wrong guideline (in the old days this was not so unusual: physicists stubbornly followed the planets-must-move-in-circles guideline for a couple of centuries).

“It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

Starting on the wrong foot, this program cannot do other than to apply a barrage of green-cheese assumptions like utility, optimization, perfect foreknowledge, production function, supply/demand function, perfect competition, capital, equilibrium, etcetera. Clearly, these conceptions are nonentities. The scientific content of all models that contain nonentities is nil — it is vacuousness wrapped in rhetoric or mathematics. Storytelling is more Keynesian, formalization is more Walrasian. There is nothing to choose between the two.

That much is evident by now: no way leads from the explication of individual behavior to an explanation of how the actual monetary economy works. Apart from manifest evidence, there are compelling methodological reasons for the repudiation of the accustomed paradigm. This means that a paradigm shift is overdue.

One problem, though, is this. In the discussion of real world issues like unemployment, debt, or bubbles it is not transparent that the respective arguments are either derived from a false underlying theory or simply ad hoc. A mass of practical details covers theoretical emptiness. The realisticness of historical/personal accounts covers the surrealism of foundational beliefs. Because of commonsensical examples and appeals political economics appears not so alien as it in fact is. In the last instance, however, it is decisive that the layperson rates an economic argument according to the subjective code like/dislike or credible/incredible and not to the objective code true/false. So the latter criterion regularly gets lost in the discussion.

What is constantly overlooked is that since Walras most models describe explicitly or implicitly a zero profit economy. Or, when profit does make an appearance it is definitively not clear what it really is (2015). The great embarrassment of economics is: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10) This vaporizes the economist's key competence.

There is no need to be conversant with the details of various economic approaches, because from the fact alone that the representative economist cannot correctly specify the difference between profit and income every layperson can safely conclude that economics as a discipline has nothing to contribute to the understanding of actual market economies.

Economists who cling to the accustomed paradigm cannot be taken more seriously than any smart journalist, no matter what the issue or the actual discussion is. The scientific content of a peer-reviewed article, an op-ed, an economist's blog, a layperson's opinion, or a sitcom is the same, that is, nil.

Egmont Kakarot-Handtke

References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

Redemption and depression

Working paper at SSRN

Abstract  According to prevailing methodological criteria, standard economics is definitively refuted. Joan Robinson's wake-up call “Scrap the lot and start again” has therefore lost nothing of its original freshness and urgency. Yet, how can the restart succeed? This inquiry builds on structural axioms. First, conceptual consistency is assured and the confusion about profit and income is dissolved. The question of interest is then how a recession or depression develops as the result of the normal functioning of the monetary economy. This involves the identification of positive feedback. A very effective mechanism consists of the circular interaction of profit and distributed profit.

Settling the theory of saving

Working paper at SSRN

Abstract  There is no way around it: each theory rests on a tiny set of foundational propositions. Standard economics rests on behavioral axioms. After a long intellectual detour it should be clear by now that behavioral axioms are the wrong formal departure point. Being beyond repair, they have to be replaced by objective structural axioms. This paper deals with saving and its relation to investment and profit. It starts from the fact that there is no such thing as a 'real' economy. Hence economic phenomena are only explicable as the outcome of the interaction of real and nominal variables.

Keynes’s missing axioms

Working paper at SSRN

Abstract  Between Keynes’s verbalized theory and its formal basis persists a lacuna. The conceptual groundwork is too small and not general. The quest for a comprehensive formal basis is guided by the question: what is the minimum set of foundational propositions for a consistent reconstruction of the monetary economy? We start with three structural axioms. The claim of generality entails that it should be possible to prove that Keynes’s formalism is a subset of the structural axiom set. The axioms are applied to a central part of the General Theory in order to achieve consistency and generality.

Intertwined real and monetary stochastic business cycles

Working paper at SSRN

Abstract  There is no such thing as a ‘real’ economy. The task, therefore, is to consistently reconstruct the fluctuations of employment and output from the interactions of real and nominal variables. The present paper does exactly this. No nonempirical concepts like utility, equilibrium, rationality, decreasing returns or perfect competition are applied. The analysis runs rigorously in objective structural axiomatic terms. Therefrom follows that it is the factor cost ratio, i.e. the relation of the nominal variables wage rate and price and the real variable productivity that, for any given level of effective demand, drives the fluctuations of employment and output.

May 24, 2015

From one roadside ditch straight into the other

Comment on Lars Syll on ‘Modelling consistency and real world non-coherence in mainstream economics’

Blog-Reference

Walras has to be credited for making great methodological progress in comparison to what he called the English School, or, what may be called with more accuracy the Cambridge School of Loose Verbal Reasoning.

What Walras correctly pointed out was (i) that partial analysis does not allow for generalizations and therefore had to be replaced by total analysis and (ii) that the forbidding wish-wash of his contemporaries had to be replaced by rigorous argument.

The methodological credo of the Cambridge School of Loose Verbal Reasoning comes in different wordings but always with the same irresistible message for muddle heads.

“Marshall followed the maxim: Better to be ambigous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

“Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

“For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’" (Davidson, 1984, p. 574)

The Elements are quite clear on multiple occasions about Walras's take on proto-scientific economics.

“To state a theory is one thing; to prove it is another. I know that in economics so-called proofs which are actually nothing more than gratuitous assertions are doled out and find acceptance again and again. And precisely for this reason, I submit that economics will not attain the status of a science until economists are compelled to demonstrate that which they have hitherto been content, in the main, mainly to assert.” (Walras, 2010, p. 427)

Walras's critique, no doubt, was valid and still is. He got economics out of a deep roadside ditch — but only to steer it into the other. He based his approach on assumptions like utility, optimization, perfect foreknowledge, production function, supply/demand function, perfect competition, capital, equilibrium, etcetera. All these notions are nonentities.

Now the problem is: one can formulate a green-cheese assumption as vivid or colorful or suggestive or precise or rigorous as one likes — it does not help.

As Lawson put it: “It is a form of modelling consistency ... that underpins the notion of equilibrium itself. In modern mainstream economics the category equilibrium has nothing to do with the features of the real economy.” (See intro)

To paint dancing angels-on-a-pinpoint or supply-demand-equilibrium does not make either real. The crucial methodological mistake, however, is not so much in the painting or the formalism but in the underlying green-cheese assumptions.

Equilibrium is a nonentity and therefore all equilibrium models are false. There are many differences between Walras and the post-Walrasians. These do not count at all. Both approaches are based on the same set of nonentities. Therefore both are irrelevant.

Unfortunately, heterodox methodologists simply do not get the crucial point. “Tony Lawson traces this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.” (See intro)

The irrelevance of economics since Walras is not due to the deductive-axiomatic method but to green-cheese assumptionism.

Note in passing that Walras's general equilibrium is a zero profit economy (2015). Since his time economists have not become tired of presenting and discussing models which every intelligent layman could immediately dismiss as irrelevant.

Economics is still in the scientific roadside ditches — one half of economists is trapped in the Cambridge ditch the other in the Laussane ditch, neither moves along the real-world road.

Egmont Kakarot-Handtke


References
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and
the Social Sciences. Cambridge, New York, NY, etc.: Cambridge University Press.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Walras, L. (2010). Elements of Pure Economics. London, New York, NY: Routledge. (1874).

The calculating auctioneer, enlightened wage setters, and the fingers of the Invisible Hand

Working paper at SSRN

Abstract  The formal foundations of theoretical economics must be nonbehavioral and epitomize the interdependence of real and nominal variables that constitutes the monetary economy. This is a cogent conclusion from the persistent collapse of behavioral and real models. Conceptual rigor demands, first, to take objective-structural axioms as a formal point of departure and, secondly, to clarify the interrelations of the fundamental concepts income and profit. The present paper reconstructs the characteristic properties of a Walrasian economy in structural axiomatic terms, generalizes them and explores the consequences for our understanding of the working of the economy we happen to live in.

Increasing returns and stability

Working paper at SSRN

Abstract  Increasing returns are an incontrovertible fact since Adam Smith hailed them as the very originators of wealth, yet they play havoc with general equilibrium. They fit, in marked contrast, nicely into the structural axiomatic framework. This indicates that it is worthwhile to replace the behavioral axioms of standard economics by objective structural axioms. These are in the present paper applied to the question of how increasing returns affect the systemic interrelations in the pure consumption economy. To invite a reality check the logical implications of the structural employment equation are set in relation to three well-known statistical relationships.

The value of water and diamonds: back to square one

Working paper at SSRN

Abstract  Taking the water—diamond paradox as a time-honored challenge, at first the structural value theorem is derived from the set of structural axioms. This enables a reevaluation of classical and neoclassical conceptions. Ricardo realized that there are two entirely different kinds of markets but excluded the secondary markets by defining commodity in a restricted sense. Walras's markets are secondary markets by construction. Primary markets thereby drop from sight. Since secondary markets presuppose primary markets the marginalistic approach is hanging in the air. The structural axiomatic approach demonstrates that the pricing in primary and secondary markets depends on different principles.

May 23, 2015

General formal foundations of the virtuous deficit--profit symmetry and the vicious debt deflation

Working paper at SSRN

Abstract  A comprehensive dynamic model of the monetary economy that produces the key characteristics of a debt deflation has been presented recently by Steve Keen as an alternative to conventional approaches. His model is based on a double-entry bookkeeping methodology but lacks an acceptable profit theory. In this respect it is not different from familiar approaches. Clearly, a deficient profit theory prevents a proper understanding of how the real world economy works. The present paper takes an entirely different route and places the core of Fisher's debt deflation theory into the context of the consistent structural axiomatic approach.

May 21, 2015

If anyone has better foundational equations, please come forward

Comment on ‘Why the ergodic theorem is not applicable in economics’

Blog-Reference

There is no way around it: each theory rests on a tiny set of foundational propositions.

“The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables.” (Schumpeter, 1946, p. 3)

Orthodoxy's behavioral axioms are now generally known to be false.

Constructive Heterodoxy's reasonably small number of equations is given here.

As long as you [Dave Taylor] cannot state your premises clearly with a few simple equations you cannot go beyond political filibuster. It is pretty clear by now, that economics has had more than enough of this stuff.

Political economics is part of the entertainment industry. Traditional Orthodoxy and Heterodoxy are sitcoms. Only theoretical economics is science. Science is about the real world.

Egmont Kakarot-Handtke


References
Schumpeter, J. A. (1946). The Decade of the Twenties. American Economic Review, 36(2): 1–10. URL

May 20, 2015

Modern economics is dead

Comment on Mark Blaug's 'Modern economics is sick'

Blog-Reference

The sickness of economics started with Jevons/Walras/Menger and the complaints about it, too. However, Schumpeter told us: “If we feel misgivings ..., all we have to do is to start appropriate research. Anything else is pure filibustering.” (1994, p. 577)

Blaug told us: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (1998, p. 703)

The first thing that has to go is the ‘totem of the micro’, that is, supply-demand-equilibrium. Here is the three-dimensional market of Constructive Heterodoxy (2015)*:

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

* For the formal foundations and the new curriculum see cross-references

Mathiness and the Ur-blunder

Comment on Lars Syll on ‘Paul Romer on math masquerading as science’

Blog-Reference

What did the great heterodox economist Georgescu-Roegen say about mathiness?

“Knight lamented that there are many members of the economic profession who are "mathematicians first and economists afterwards." The situation since Knights time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists.” (1979, p. 317)

The definition of mathiness is that somebody gets both wrong: economics and mathematics. This applies without doubt to growth theory from Solow via Romer to Lucas. What is lacking is economic substance, the models are vacuous.

What did the great heterodox economist Georgescu-Roegen say about the correct application of mathematics?

“Lest this position is misinterpreted again by some casual reader, let me repeat that my point is not that arithmetization of science is undesirable. Whenever arithmetization can be worked out, its merits are above all words of praise. My point is that wholesale arithmetization is impossible, that there is valid knowledge even without arithmetization, and that mock arithmetization is dangerous if peddled as genuine.” (1971, p. 15)

Nobody can argue with the great heterodox economist Georgescu-Roegen: formalization is desirable wherever possible but mathiness is not desirable.

Orthodoxy, of course, is guilty of mathiness but this is only the minor point. The main point is the vacuousness of fundamental concepts like optimization, utility, equilibrium, production function, capital, perfect competition, demand function, etcetera. All these concepts are nonentities like Batman or the Easter Bunny.

As a rule, it is not formalization that has to be criticized, it is the all pervasive green-cheese assumptionism which is the hallmark of Orthodoxy.

“When very sound and proper mathematics is misused and misapplied to fairyland problems without any basis in the real world, that fact that the mathematics itself is impeccable makes the whole obnoxious game just that more offensive.” (Blatt, 1983, p. 173)

The Ur-blunder of Orthodoxy is that that the whole theoretical edifice is based on a specific behavioral assumption.

“There is in economics, or at least among the overwhelming majority of its disciples, broad agreement as to what represents the corpus of their subject. This corpus revolves around the concept of maximizing behaviour, whether it be by the individual, firm or institution.” (Blaug, 1990, p. 209) see also (2014)

The assumption of profit maximization, for one, necessitates a couple of further assumptions. And here the the trouble starts. The firm or the economy must be formally endowed with a production function. This function must have very specific properties. One of them is decreasing returns. Thus, we start with a behavioral assumption and end with an assertion about the physical reality of production. And here is where the Ur-blunder comes in: Reality cannot be molded to make a behavioral assumption applicable. Production functions are nonentities. And this is why growth theories since Solow are vacuous. All of them.

Orthodoxy can give up all except constrained optimization. Because constrained optimization is a nonentity Orthodoxy has to be given up.

Egmont Kakarot-Handtke


References
Blatt, J. (1983). How Economists Misuse Mathematics. In A. S. Eichner (Ed.), Why Economics is Not Yet a Science, pages 166–186. Armonk, NY: M.E. Sharpe.
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge, MA: Cambridge University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL

Related see cross-references  Incompetence and Proto-science and Political economics

Profit (not mathematics) is the key

Comment on ‘The fetishism of mathematics’

Blog-Reference

You [David Ruccio] nearly hit the jackpot of theoretical economics.

You write: “But there’s something else going on here — not just an attack on mathematical “errors” committed in various areas of contemporary growth theory and the defense of a particular notion of science .... It’s the problem of capital. As I often explain to students ..., the theory of capital is the most controversial topic in the history of economic thought because the theory of capital is the theory of profits — and therefore an answer to the question, do the capitalists deserve the profits they get?” (See intro)

The question whether capitalists “deserve” the profits they get is, clearly, a normative question. It leads straight away to moralizing. Everybody likes moralizing but let us resist the temptation to go further in this direction here.

The first question to ask is rather: What exactly is profit and how is it determined for the economy as a whole? One should think that economists have found an answer in the last 200 years to this all important question. Did they?

“Rather surprisingly, therefore, the nature of profits remains something of a mystery in contemporary economics; indeed, in the realm of "advanced" theory — namely the perfectly competitive general equilibrium models — profits have disappeared altogether. This is clearly an unsatisfactory situation. It is, first of all, illogical at best to argue both that profits are the mainspring of the capitalist system and that they do not exist. And second, the disappearance of profits from theory has not been accompanied by a similar phenomenon in the real world, where, in fact, profits (and losses) live on. Surely the task of theory is to account for this appearance, not ignore it.” (Obrinsky, 1981, p. 491), see also (Desai, 2008)

It is also a curious observation that profit does not appear once in the JEL Classification Code of economic subjects.

This is the fact of the matter: Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.

There is only one bright spot in the utter scientific darkness. The exception is Constructive Heterodoxy (2015).

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL

See also cross-references

May 18, 2015

The science that never was

Comment on ‘Paul Romer on math masquerading as science’

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“The goal in starting this discussion is to ensure that economics is a science that makes progress toward truth.” (See intro)

Reassuring declarations like this appear regularly when economics is in crisis and they have regularly been counter-productive.

“The claim to the scientific nature of economics is prey to suspicion the moment that it fails to be self-evident.” (Benetti and Cartelier, 1997, p. 211)

What is in fact self-evident is that economics is a failed science. And this not as recently as the onslaught of some mathematical extremists but at least as the beginning of Neoclassics itself.

One curious thing to notice is that the thread's title sends the reader in the wrong direction. The problem has never been that math had masqueraded as science. The real embarrassment has always been that economists have used math in order to masquerade as science.

However, what comes across is that something has gone badly wrong with math. This, as has been suspected by so many for so many years, is apparently against the spirit and standards of science. And now it falls upon Paul Romer to save the economics world.

“The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.” (See intro)

As matters stand now, some people, nice colleagues, have to be expelled from the temple of economics but Romer is acting in the best interest of the whole profession.

“Economists have a collective stake in flushing mathiness out into the open.” (Romer, 2015, p. 90)

Why? What stake? How did the crown jewel of economics become something to be flushed? Let us speculate. Could this be a strategic withdrawal? Is the dispensable ‘bad’ mathematical freak sacrificed for the benefit of the ‘good’ realistic maximization-and-equilibrium kind of guy?

The Great Recession has now come back on economics itself. On closer inspection, a growing number of non-economists rate it quite realistically as what it is: good for entertainment but not up to the scientific task. The writing is on the wall, Soros spends millions on New Economic Thinking and students defect to Heterodoxy and pluralism.

Time to close ranks and to make a sacrifice to calm the angry masses. Among the most popular points of critique excessive math has always been at the top of the charts. And the likes of Lucas, McGrattan, Prescott, Moll et.al. (sorry, dear colleagues, (Romer, 2015, p. 92)) have simply gone over the top. Their economic absurdities are so drastic that even the representative economist, who swallows almost everything, cannot swallow this ‘lemon’ (Romer, 2015, p. 90). The New Classical mathies have to be flushed to save the core of Orthodoxy.

This does not suffice. In order to ‘exclude people who opt out of the norms of science’ one must exclude the overwhelming majority of economists from economics. Why? Because they subscribe to the same fundamental methodological mistake/error.

“There is in economics, or at least among the overwhelming majority of its disciples, broad agreement as to what represents the corpus of their subject. This corpus revolves around the concept of maximizing behaviour, whether it be by the individual, firm or institution.” (Blaug, 1990, p. 209) see also (2014a)

This faulty behavioral axiom has produced numerous offspring: supply-demand-equilibrium, general equilibrium, marginal utility, well-behaved production functions, total income = value of output, total income = wages + profits, marginal product distribution, I=S, and others that fill the textbooks (2014b).

It is bizarre that economists, who after more than 200 years still cannot tell the difference between profit and income and have still not realized that utility and equilibrium and production functions are nonentities like dancing angels on a pinpoint, suggest that there is a valid scientific core that is jeopardized by mathiness.

There is no such core, Paul Romer's fallback position is untenable. Scientific incompetence, not mathiness, is the problem of economics. ‘Progress toward truth’ is hindered by Paul Romer and the maximization-and-equilibrium kind of guys themselves. Nothing less than a paradigm shift will do.

Egmont Kakarot-Handtke


References
Benetti, C., and Cartelier, J. (1997). Economics as an Exact Science: the Persistence of a Badly Shared Conviction. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, pages 204–219. Cheltenham, Brookfield, VT: Edward Elgar.
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Romer, P. (2015). Mathiness in the Theory of Economic Growth. American Economic Review: Papers & Proceedings, 105(5): 89–93. DOI

May 17, 2015

Essentials of Constructive Heterodoxy: financial markets

Working paper at SSRN

Abstract  What stands before all eyes as failed Orthodoxy is ultimately caused by the wrong answer to Mill's Starting Problem. It is now pretty obvious that one cannot put utility maximization, equilibrium, well-behaved production functions, ergodicity or any other physical or psychological or sociological or behavioral assumption into the premises. No way leads from such premises to the explanation of how the actual market economy works. The logical consequence is to discard them. Having first secured a superior formal starting point, the present paper addresses the question of how the various types of financial markets emerge from the elementary monetary circuit.

Market blunder

Comment on David Ruccio on ‘Economics and the value of art’

Blog-Reference

Ricardo excluded the pricing of ‘rare statues and pictures, scarce books and coins’ from his formal theory of value and called them non-produced consumption goods (Mandler, 1999, p. 68). The labor theory of value was always meant to apply to produced consumption goods only. Subjective value theory blurred this distinction.

Since non-produced consumption goods have indeed been produced, albeit some time ago, their price has to be determined in the secondary market. The pricing in the secondary market is entirely different from the pricing in the primary market. Hence it is not correct to speak of THE market without qualification. As Tobin put it: "’Market’ is one of the most overworked and imprecise words in economics.” (1980, p. 796)

It is one of the greater blunders of Orthodoxy to apply the silly supply-demand-equilibrium plaything across the board. The price determinants of the primary and the secondary market are entirely different. For the correct market theory see (2011), in particular the section ‘Wealth creation in the secondary market’.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Mandler, M. (1999). Dilemmas in Economic Theory. Oxford: Oxford University Press.
Tobin, J. (1980). Are New Classical Models Plausible Enough to Guide Policy? Journal of Money, Credit and Banking, 12(4): 788–799. URL

May 15, 2015

What scientists in all ages knew

Comment on Lars Syll on ‘Why the ergodic theorem is not applicable in economics’

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“The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions.” (Brown, 2011, p. 211)

It is a bit strange that economists, who after more than 200 years still cannot tell the difference between profit and income and have still not realized that utility and equilibrium are nonentities like dancing angels on a pinpoint, lecture physicists about the ‘intersubjective transfiguration of classical Newtonian principles guided by general relativity’s equivalence principle.’

Orthodoxy is odd enough and Heterodoxy should not strive to surpass what will be footnoted in the history of ideas as an embarrassing scientific aberration.

Egmont Kakarot-Handtke


References
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.

May 14, 2015

No license for drivel

Comment on Fred Zaman on ‘Why the ergodic theorem is not applicable in economics’

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Neither Orthodoxy nor Heterodoxy has a license for incompetence. Orthodoxy has been debunked beyond recovery for its formal and material inconsistencies and not because we don't like it for some reason. The first requirement of scientific work is that you can read and understand. Obviously, you cannot. You simply repeat your anti-mechanistic mantra.

“Your model of the economy appear to be no less mechanistic than any you would propose to replace — this perhaps is your Achilles heel.”

If you could read and understand, you would realize that my previous post clearly states: “The 7th equation finally describes human behavior in the most general form as target-oriented.” Target-oriented or intentional is clearly different from mechanistic.

Please note also that the axiomatic foundations of a theory are not a model (or modl as Leijonhufvud calls the economist's proto-scientific plaything). And finally, both Newton and Einstein applied the axiomatic-deductive method. For the first pages of Principia see here.

What all this tells you is that it is an absolute necessity in any field — not excepting economics — to state one's premises clearly. Waffling about the old mechanism/vitalism chestnut or psychology or sociology or physics simply won't do. This, of course, has always been the Achilles heel of traditional Heterodoxy and this is why the failure of economics as it lies open before all eyes must be attributed to both Orthodoxy and Heterodoxy.

Egmont Kakarot-Handtke

May 13, 2015

Formal and verbal description of the evolving economy

Comment on 'Why the ergodic theorem is not applicable in economics'

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For the reader's convenience here again the short list of the economic propositions which may reasonably be received without proof.

Because these seven equations contain the core of all of heterodox economics a reasonable verbal description fills a textbook. So, here is the compact overview.

The first three equations describe the structure of the most elementary economic system, that is, the pure consumption economy. The equations stand for income generation, production, consumption and relate to a period of predetermined length.

The 4th equation describes the time paths of the variables of the first three equations. The three dots symbolize the discrete rates of change per period.

The 5th equation says that total profit is the sum of monetary profit and nonmonetary profit. The 6th equation says the same for saving.

The 7th equation finally describes human behavior in the most general form as target-oriented. Directed human behavior and chance determine the rates of change in the 4th equation.

All equations together define an open ended simulation of the elementary economy which, as a well-defined mathematical object, can be formally summarized by one single equation.

The shortest verbal description of the equations' objective economic content spans 16 pages and is titled Essentials of Constructive Heterodoxy: Behavior.

Egmont Kakarot-Handtke

May 12, 2015

Einstein, Mill and the Starting Problem

Comment on Lars Syll on ‘Why the ergodic theorem is not applicable in economics’

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Thank you [Fred Zaman] for the link to the Lehmkuhl article.

Einstein, of course, is significant for economics — yet it is not his physics that is of importance but his methodology. And here comes the big surprise, Einstein got his ideas from an economist. Indeed, physicists understood J. S. Mill better than the hordes of economists from his time onwards.

“They [Einstein and Dirac] agreed that science was fundamentally about explaining more and more phenomena in terms of fewer and fewer theories, a view they had read in Mill's A System of Logic.” (Farmelo, 2009, p. 137)

Mill, in turn, was quite clear that the first task of every science is to get the fundamentals right. This is Mill's Starting Problem.

“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (Mill, 2006, p. 746)

And now all is pretty obvious: you cannot put utility maximization, equilibrium, ergodicity or any other physical or psychological assumption into the premises. After the failure of Orthodoxy, it falls to Heterodoxy to spell out the economic propositions ‘which may reasonably be received without proof.’

This is what Constructive Heterodoxy is all about.

Egmont Kakarot-Handtke


References
Farmelo, G. (2009). The Strangest Man. The Hidden Life of Paul Dirac, Quantum Genius. London: Faber and Faber.
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. URL

* For the short list of propositions see Answer to Fred Zaman

May 11, 2015

Physics as obsessive windmill

Comment on Lars Syll on ‘Why the ergodic theorem is not applicable in economics’

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From equilibrium to ergodicity economists have misunderstood and abused physical concepts. One should think that after more than two hundred years of consistent failure at least Heterodoxy would be out of physicalism. That much is clear from this thread, Fred Zaman is not.

One cannot by any stretch of the imagination enlist Einstein for ‘macroeconomic anthropology.’

“Like Planck, Einstein viewed the human element of any physical theory as essentially arbitrary, something that should be purged on realization of the final true theory.” (Mirowski, 2004, p. 159)

One cannot by any stretch of the imagination enlist Einstein for ‘ontological falsification.’

“On the contrary the scientists of those times were for the most part convinced that the basic concepts and laws of physics were not in a logical sense free inventions of the human mind, but rather that they were derivable by abstraction, i.e. by a logical process, from experiments. It was the general Theory of Relativity which showed in a convincing manner the incorrectness of this view. For this theory revealed that it was possible for us, using basic principles very far removed from those of Newton, to do justice to the entire range of the data of experience in a manner even more complete and satisfactory than was possible with Newton's principles. But quite apart from the question of comparative merits, the fictitious character of the principles is made quite obvious by the fact that it is possible to exhibit two essentially different bases, each of which in its consequences leads to a large measure of agreement with experience.” (Einstein, 1934, p. 166)

What Einstein lays out here is the axiomatic-deductive method which has been applied with overwhelming success by Newton.

“Could all the phaenomena of nature be deduced from only thre [sic] or four general suppositions there might be great reason to allow those suppositions to be true.” (Newton, quoted in Westfall, 2008, p. 642)

Stop physicalism, stop psychologism, stop sociologism: start at long last with economics proper. It is not science that has to be reinvented, it is economics.

Egmont Kakarot-Handtke


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Mirowski, P. (2004). The Effortless Economy of Science? Durnham, London: Duke University Press.
Westfall, R. S. (2008). Never at Rest. A Biography of Isaac Newton. Cambridge: Cambridge University Press, 17th edition.

Science and travesty

Comment on Lars Syll on ‘Why the ergodic theorem is not applicable in economics’

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You [Fred Zaman] say “Understanding the relationship of this effort to the mechanistic worldview of Newtonian physics, however, which permeates virtually all of science, is something that will be achieved only by those with an open mind on the subject, and have the interest to pursue it.”

Let us put some things straight.

When one compares the respective starting points — Newton and Smith — and the actual state of the fields then one is driven to the conclusion that in the course of time economics has fallen behind even farther.

Neither orthodox nor heterodox economists have a clear idea of the fundamental economic concepts income and profit. What is known for sure from the most elementary structural axiomatic analysis is that the conventional approaches are logically deficient (2014). Doing economics without a clear idea of income and profit is pointless. It is like doing physics without a clear idea of force and mass.

From past performance, Steve Keen has drawn the correct conclusion.
“The position I now favor is that economics is a pre-science, rather like astronomy before Copernicus, Brahe and Galileo. I still hold out hope of better behavior in the future, but given the travesties of logic and anti-empiricism that have been committed in its name, it would be an insult to the other sciences to give economics even a tentative membership of that field.” (Keen, 2011, p. 158), see also (2013)

Economists are simply not in the position to lecture Newton post festum on methodology.
“According to one widely held viewpoint in the history of ideas, eighteenth-century thought was dominated by the concept of the "Newtonian world-machine." God had been assigned the role of master clockmaker who designed a universe so perfect that it could run indefinitely without any need for divine tinkering. Closer inspection of Newton's own writings shows that he was actually quite firmly opposed to this concept which had been popularized by earlier writers such as Robert Boyle.” (Brush, 1976, p. 605)

Egmont Kakarot-Handtke


References
Brush, S. G. (1976). Irreversibility and Indeterminism: Fourier to Heisenberg. Journal of the History of Ideas, 37(4): 603–630. URL
Kakarot-Handtke, E. (2013). Toolism! A Critique of EconoPhysics. SSRN Working Paper Series, 2257841: 1–13. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.

What economics is not about

Comment on Lars Syll on ‘Why the ergodic theorem is not applicable in economics’

Blog-Reference

Economics is not about the behavior of individuals (this is the subject matter of psychology/ anthropology), neither about the relations of groups/classes (this is the subject matter of sociology/political sciences), nor about the behavior of Nature (this is the subject matter of the natural sciences), it is, rather, about the behavior of the economic system.

Because economics deals with a distinct subject matter, which, no doubt, is interwoven with all other domains, it needs a distinct framework of economic concepts consisting of, for example, price, productivity, profit, wage rate, saving, market clearing, deflation, you name it. Neither Orthodoxy nor Heterodoxy has developed a consistent framework of analytical concepts. This is why economics resembles nothing so much as ‘Babylonian incoherent babble’ (Davidson).

I can understand your preoccupation with power and conflict. What I cannot see is how this relates to Newton’s definition of force, mass, acceleration, inertia or gravitation; or, for that matter, to ergodicity or relativity. It is not the economist's business to reinterpret these well-defined concepts for his alien purposes.

Isn't it curious that economists dabble in virtually all disciplines except economics proper? And isn't it perfectly understandable that they have become a scientific laughingstock?

Egmont Kakarot-Handtke

Toolism! A critique of EconoPhysics

Working paper at SSRN

Abstract  Economists are fond of the physicists' powerful tools. As a popular mindset Toolism is as old as economics but the transplants failed to produce the same successes as in their aboriginal environment. Economists therefore looked more and more to the math department for inspiration. Now the tide turns again. The ongoing crisis discredits standard economics and offers the chance for a comeback. Modern EconoPhysics commands the most powerful tools and argues that there are many occasions for their application. The present paper argues that it is not a change of tools that is most urgently needed but a paradigm change.

May 10, 2015

The Big Bang Theory of economics

Comment on Lars Syll on ‘Why the ergodic theorem is not applicable in economics’

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It should be clear by now — long after Mirowski's classic ‘More Heat than Light’ (1995) — that physical conceptions are inapplicable in economics. This holds for equilibrium, field, ergodicity, the quantum wave function, special/general relativity, and all the rest.

What can be actually learned from physics is that each discipline has to work out its own framework of concepts and its own mathematical tools.

It is bizarre enough to see people who cannot tell the difference between profit and income (2015) wrecking their brain about ergodicity and relativity in economics. But it blows the mind to see Samuelson, the very same who introduced ergodicity and other physicalisms into economics, upbraiding the profession:

“Now what in the world has all this to do with economics? There is really nothing more pathetic than to have an economist or a retired engineer try to force analogies between the concepts of physics and the concepts of economics. How many dreary papers have I had to referee in which the author is looking for something that corresponds to entropy or to one or another form of energy. Nonsensical laws, such as the law of conservation of purchasing power, represent spurious social science imitations of the important physical law of the conservation of energy; and when an economist makes reference to a Heisenberg Principle of indeterminacy in the social world, at best this must be regarded as a figure of speech or a play on words, rather than a valid application of the relations of quantum mechanics.” (Samuelson, 1975, p. 332)

This was an extremenly rare event, Samuelson had the right intuition: all this has nothing to do with economics. So, throw all physical concepts and analogies out of the window. Equilibrium first, then ergodicity, then the rest.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Samuelson, P. A. (1975). Maximum Principles in Analytical Economics. Synthese, 31(2): 323–344. URL

May 9, 2015

Matter matters: productivity, profit, and non-marginal factor prices

Working paper at SSRN

Abstract  Tastes and technology are the ultimate givens of standard economics. Their interaction is mediated by the marginal principle. This approach is unsuitable to explain the nature and magnitude of overall profit and its distribution within the business sector. The present paper therefore takes a quite different analytical route. The standard behavioral axioms are replaced by objective structural axioms and the standard production function is replaced by a sequential production function. From this new formal basis two exemplary factor prices, the product price, and the real wage are derived under the conditions of market clearing and equal profit ratios.

May 8, 2015

Troubles with logic?

Comment on Lars Syll on ‘On the irrelevance of general equilibrium theory’

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Ezra Davar says about the Post-Walrasians: “In fact, each of them, when carefully examined, was trying to create his own general equilibrium theory — which formally resembles Walras’s approach — but actually is no more than a distortion of Walras’s theory.”

I agree with you. The Post-Walras approaches of  'Pareto, Cassel, Schlesinger, Wald, von Neumann, Hicks, Keynes, Lange, Patinkin as well as Arrow, Debreu, Friedman, Samuelson, Solow and others' are defective and unacceptable.

From this, however, does not follow that Walras suddenly becomes acceptable.

The common denominator of all these approaches is that they are based on the notion of equilibrium. My post of 26th states: “Because equilibrium is a nonentity all equilibrium models are methodologically unacceptable. This includes Walras’s original model.”

In addition, this includes Marshallian, Keynesian, Post Keynesian, New Keynesian, and New Classical equilibrium models. What could be unclear about all?

Egmont Kakarot-Handtke

Framing the economic discourse

Comment on ‘Seven principles to guard you against economics silliness’

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Noah Smith writes “In the increasingly contentious world of pop economics, you … may find yourself in an argument with an economist.” (See intro) He then enumerates seven principles to deal with the situation. As one would expect from a twittering economist, his advice is rather shallow. The fact of the matter is: there is no real guard against economists' all pervasive silliness. Yet much can be done to minimize collateral damage. For any economic discourse it helps to have a frame of reference.

Rule of discrimination: There is political economics and theoretical economics. The former deals with agenda pushing, the latter with scientific knowledge. The former is scientifically worthless, the latter barely existent.

Rule of economics studies: As soon as somebody starts an explanation with painting something like a supply and demand curve you can be sure you have a silly person before you.

Rule of anything goes: Economics is awash with manifest contradictions and economists are not much disturbed with either formal or material inconsistency. Because of this, economists can explain everything and the opposite of it.

Rule of problem solving: The answer to any economic problem is inconclusive wish-wash because, after all, the economy is rather complex. Because of this, it is almost impossible to prove an economist wrong. As Keynes once put it: 'nothing is clear and everything is possible.'

Rule of false premises: Economists do not even get their bookkeeping identities right. Keynes, for example wrote Y=C+I and ended with I=S. All models that contain I=S are logically defective but still much in use. The same holds for Y=W+P, i.e., total income is equal to wages plus profits. To be sure, bookkeeping is elementary mathematics. It is important to always bear in mind that economists fail already at this stage.

Rule of futility: Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.

Rule of credentials: True, there are intelligent and silly heterodox economists, but there can be no such creature as an intelligent orthodox economist. Orthodoxy is indefensible.

Rule of non-acceptance: Ask any economist whether he applies one of these items: supply-demand-equilibrium, general equilibrium, marginal utility, well-behaved production functions, total income = value of output, total income = wages + profits, I=S, behavioral premises like optimization? If he says yes tell him to come back after he has done his scientific homework.

Rule of New Economic Thinking: We do not know whether Heterodoxy is true, but we know that Orthodoxy is false.

Schumpeter's overarching principle: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

Egmont Kakarot-Handtke

May 7, 2015

Heterodoxy simply does not apply ergodicity

Comment on ‘Why the ergodic theorem is not applicable in economics’

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Imagine a rather elementary economy. Total employment is L, the wage rate is W. So total wage income is Y=WL. The household sector's total consumption expenditures are C and equal to price P times quantity bought X, i.e. C=PX. The productivity is R, so output is O=RL. In the initial period the market is cleared X=O and the budget is balanced C=Y.*

Now, let the five elementary variables L, W, P, R, X vary at random. The respective rates of change are symmetrical around zero and a distribution function is defined so that each path meets the condition of ergodicity. Hence, by construction, each path and the whole economy is initially ergodic.

When we run a simulation we observe a changing stock of inventory, because O-X is always different from zero, and a changing stock of money, because Y-C is always different from zero. The two stocks follow random paths.

Next, the agents enter. The business sector sets the price in order to bring the inventory to a target value and to clear the market. Likewise the household sector adapts consumption expenditures in order to bring the stock of money to a target value and to balance the budget.

Obviously, the economy is no longer ergodic. The reason is that agents are target oriented and interfere with pure randomness. Their behavior is formally defined by the propensity function (2015) which eliminates the initial ergodicity through directed randomness.

Ultimately, this has nothing at all to do with uncertainty or nomological machines or rational expectations. The sheer existence of agents in a pure random system suffices to eliminate initial ergodicity.

No heterodox economist worth his salt would ever apply ergodicity. True, orthodox economists still do but they are already irrecoverably over the cliff. Thus, it does not really matter.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. URL

*   For the complete formalism see here and for the graphical representation here
** See also the related post on RWER

What are Walrasians waiting for?

Comment on ‘On the irrelevance of general equilibrium theory’

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Walras tried to formulate a general equilibrium theory (GET). Middle-of-the-road economists like Cassel were quite happy with it but when mathematicians like Wald and von Neumann looked closer at it they were struck by the naivete of economists. Von Neumann pointed the way that led ultimately to Debreu, Arrow, McKenzie. General equilibrium has therefore to be regarded as a correction of Walras's untenable model. This formal rectification, though, had to be bought with some unacceptable behavioral assumptions like the auctioneer.

As things turned out, GET in its mathematically correct neo-Walrasian form does not hold water either (Ackerman and Nadal, 2004; Ingrao and Israel, 1990).

So all arguments are on the table and there is no need for me to explain the numerous defects of the Walrasian approach to Ezra Davar who thinks the truth will come to him when he waits long enough (see his preceding post). All proofs are assembled at SSRN and come with a mouse click.

The crucial question is this. If all is clear and settled, why are there still Walrasians around? The answer is long known.
“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

In economics it is indeed possible to argue ‘as if nothing had happened.’ And this means that, for some reason, the scientific mechanisms do not work properly. This explains why economics is a failed science.

For a heterodox economist there is not one good reason to occupy himself with Walrasianism in any of its futile variants. The issue has been decided long ago.

Equilibrium is a nonentity. It falls to the remaining stray Walrasians to get the point and to rise to scientific standards.

Egmont Kakarot-Handtke


References
Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York, NY: Routledge.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

May 6, 2015

The epic ping-pong of empty problem and vacuous solution

Comment on 'Transaction Cost Confusion’

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You say “Transaction costs were invented by Ronald Coase to help explain why we see business firms littering the economic landscape when orthodox economic theory argues that the marketplace is the superior and unequalled coordinator of economic activity.” (See intro)

That ‘the marketplace is the superior coordinator’ is an assertion that needs proof. No such proof exists. So it is still an open question. Because of this, there is no need at all to invent a new explanation for the existence of the firm.

All the more so, as the correct answer has already been given by Adam Smith. Remember the pin factory? Division of labor and exchange are the two sides of the same coin and reinforce each other. This interaction is the big bang of the market system's vast expansion (see also 2014). Division of labor, clearly, presupposes the firm.

What Coase and Williamson explain is that pigs can fly because they have yellow wings.

“Cunningham in 1891 remarked that in the choice of premises “it is not always easy to tell when a professor of the dismal science is making a joke” and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself.” (Viner, 1963, p. 12)

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Exchange in the Monetary Economy. SSRN Working Paper Series, 2387105: 1–19. URL
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp. 1–22. URL

Exchange in the monetary economy

Working paper at SSRN

Abstract  It is clear by now that pure exchange models are useless. For two reasons. First, because exchange is the other side of specialization in production, and, second, because a direct exchange of goods does not take place in the monetary economy. The decisive drawback of conventional exchange models, though, is that they cannot explain profit. Standard economics rests on behavioral assumptions that are expressed as axioms. The ultimate reason for the failure of conventional exchange theory is that human behavior and axiomatization are disjunct. Notable progress can be made by replacing the subjective-behavioral axioms by objective-structural axioms.

Walras's vacuonomics

Comment on ‘Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney, the economic statisticians and rent incomes’

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Among the numerous defects of Walras's approach the worst is that he deals with a zero profit economy. In other words, he talks about capitalism without profit. So he has not much to say about the real world.

For the correct relationship between profit, distributed profit, and land ownership see: Essentials of Constructive Heterodoxy: Institutions.

Egmont Kakarot-Handtke

May 5, 2015

What you always wanted to know about rent and profit

Comment on 'Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney, the economic statisticians and rent incomes’

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As it happens, the interconnection between profit, distributed profit, ‘rent’ and land ownership has already been untangled by Constructive Heterodoxy under the title Essentials of Constructive Heterodoxy: Institutions.

The correct rent theory is part of the new heterodox curriculum.

Why should anybody wait for Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney ‘to take steps in the right direction’ (as orthodox economists they are irrecoverably over the cliff)? The real message is that Heterodoxy has already settled the question.*

Egmont Kakarot-Handtke

*See also the working paper When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism at SSRN

From PsySoc to SysHum

Comment on Lars Syll on ‘Rational expectations — totally incredible bogus’

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The student of economics either understands at his very first encounter with Econ 101
• that behavioral assumptions like utility, optimization, rational expectation, supply/ demand functions and equilibrium are nonentities;
• that in mathematics there exists a ‘whole crop of monster-structures, entirely without application’ (Bourbaki, 2005, p. 1275, fn. 9);
or unfortunately not.

The student with a modicum of scientific guts becomes by logical necessity a heterodox economist. He will avoid nonentities and inapplicable monster-structures and debunk them wherever they appear.

This is right and good, but it is not good enough.

What everybody wants and needs is the correct theory and the congenial math. What nobody needs is another surrealistic discussion about rational expectations, ergodicity, the fixpoint theorem, or multiple equilibria.

The reason why Heterodoxy has only been marginally successful is that it shares the foundational blunder with Orthodoxy.

The crucial point is that economics deals — in the first place — not with individual human behavior or society at large. This is the realm of psychology, sociology, anthropology, history, politics, etcetera. Insofar as economics deals with behavioral assumptions like utility maximization, greed, power grabbing, etcetera, it is a dilettantish variant of Psycho-Sociology or PsySoc.

What is the real subject matter of economics?

As a first approximation, one can agree on the general characteristic that the economy is a complex system.

However, with the term system one usually associates a structure with components that are non-human. In order to stress the obvious fact that humans are an essential component of the economic system the market economy should be characterized more precisely as a complex hybrid human/system entity or SysHum.

The scientific method is straightforwardly applicable to the sys-component but not to the hum-component. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective system-component.

In gestalt-psychological terms the economic system is the foreground, individual behavior the background. Common sense wrongly insists that the hum-component must always be in the foreground. This fallacy compares to geo-centrism. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the Invisible Hand.

Heterodoxy will be inextricably tied to failed Orthodoxy as long as it is content with making homo oeconomicus ‘more realistic.’ The student with a modicum of scientific guts goes beyond flat behavioral common sense, quits PsySoc altogether, and turns to SysHum.*

Egmont Kakarot-Handtke


References
Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, volume II, pages 1265–1276. Oxford, New York, NY: Oxford University Press. (1948).

* For the new curriculum see the cross-references

Related 'The Science-of-Man fallacy' and 'The ur-blunder of economics and its rectification'

May 4, 2015

Economics is not what most economists think it is

Comment on 'Coase and Reality’

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Imagine for a moment a rather elementary economy. Total employment is L and there are two firms. The wage rate W is equal and fix. So total income Y=W(L1+L2) is fix. The household sector spends this total income, hence total consumption expenditures C are equal to Y and fix. No saving/dissaving. The productivities R1, R2 are fix in both firms. Under the condition of zero profit the respective market clearing prices are equal to unit wage costs, i.e., P1=W/R1 and P2=W/R2. Labor can be shifted between the two firms at short notice, so the only question that is open from the viewpoint of the business sector is how will the households split consumption expenditures C between the two goods? As soon as the firms know this they will allocate total labor input accordingly. As a result, consumers get exactly want they want, markets are cleared, all budgets are balanced, labor is fully employed and gets the whole product.

How does standard economics answer this elementary question? The partitioning of C is defined by the equality of the marginal rate of substitution MRS and the price ratio.

Seems to be a sensible answer. We have the price ratio — but how exactly do we get the MRS?

This is the moment of truth. In this way, nobody can ever answer the most elementary question of consumer theory because MRS is a nonentity.

This, though, is not the end of the story. Now phantasy gets busy. Can you imagine a set of preferences? Yes, I can, but then the MRS follows from my definition of the set. That is, I put the answer in the hat in the form of well-defined preference curves and then pull it out as MRS. Obviously, this is scientifically illegitimate. End of story. Nice try. Orthodoxy is gone.

Not yet, because now the heterodox economist steps in and tells us:
“The consumer in economics is not a life form, for life forms have to realize their needs for real and measurable benefits from consumption, rather than maximize their so-called preferences, if they to survive.” (See previous post of Larry Motuz)

Very true, nobody can say much against survival. But, wait a minute! The question was how do the households partition the total consumption expenditures C?

Heterodoxy is correct in pointing out that the introduction of preferences is a methodologically unacceptable move. But frankly, is the waffling about life form, benefits and survival one iota better?

Actually, it is worse. Because now we are entangled in a discussion about the motives of the consumers. And, clearly, this is psychology, sociology, politics, and what you have, but it is not economics. Economics is first and foremost about how the economy works* and not about how people tick.

Egmont Kakarot-Handtke

* For the correct approach see cross-references

May 3, 2015

Freaky games

Comment on 'Coase and Reality’

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“Criticizing the bulk of modern economics for its extraordinary lack of realism has become a tiring and unproductive exercise.” (See intro)

Really? It seems that the protagonists show no signs of tiredness. On the contrary. The Heterodox ridicule utility maximization, the Orthodox escalate with even more ridiculous rational expectations. The Heterodox point to uncertainty, the Orthodox escalate with ergodicity. The Heterodox say equilibrium is impossible, the Orthodox escalate with the outer worldly fixpoint theorem. In the course of a lively debate the distance from reality grows in fact exponentially. What goes wrong?

“The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

And exactly at this crucial juncture the differences between Orthodoxy and Heterodoxy vanish.
“... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

Thus, the funny game goes on, with occasional regrets.
“Whether it is what the rest of us need to know as we grapple with our economic issues is another matter entirely.” (See intro)

High time that ‘the rest of us’ simply leaves traditional Orthodoxy and Heterodoxy behind in their cojoint proto-scientific cul-de-sac.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.